Saturday, February 11, 2012

If you have a USDA Rural Development Guaranteed Mortgage on your home you may have heard about USDA's home loan pilot program that allows buyers to refinance those loans to a lower interest rate. USDA had a news release on Feb. 1, 2012 titled: "Obama Administration Announces Pilot Program to Help Rural Borrowers Refinance Mortgages, Get Lower Interest Rates". My father would say: "If it sounds too good to be true, it probably is!" There are new fees USDA Rural Development is not telling you about. In the long run it will cost you much more, even if you do lower the interest rate.

I'm going to cover the good and the bad so you can make an informed decision. I'll try not to get political but I'll tell you up front that this really makes me cross eyed. They are pushing it like they are "trying to help the middle class home owner". In reality the middle class home owner and the lenders are getting screwed while our Government collects more of your hard earned money in new fees that will run for the life of the loan.

OK. Let us start with the good things; no new credit report required, no new appraisal needed, no HUD Handbook minimum property determinations, and no addition property inspections required. You DO have to meet current income eligibility but no Debt to income ratio calculations are required. You cannot have any late mortgage payments in the last 12 months.

This pilot program is only available in these 19 states: Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Nevada, New Jersey, New Mexico, North Carolina, Ohio, Oregon, Rhode Island, South Carolina, and Tennessee. The property does have to be in an eligible rural area.

Here are the not so good things. First of all let's consider that you have already closed this loan. You have already paid, or financed into the loan, the government Up Front fee which was between 2 - 3.5% of the principle balance, depending on when you closed your loan. Calculate that. On a $100k mortgage, that is $3500. You have also paid all your closing costs that probably ranged somewhere between $3000 to $5000. So, ... you have already paid around $8 - 10K for your mortgage (not including interest). Hey, and you are doing fine making your payments every month.

Now the Administration says they want to help you out so they are going to LET you refinance your mortgage. BOHICA! First of all you'll have to pay another government "Up Front fee" of 1.5% of the principle balance. You will also have to pay closing costs again for the new loan. You won't have the cost of an appraisal or a credit report but you will have to pay all other lender fees including a 1% origination fee. All of this will probably cost you an additional $4 - 6K depending on the size of your loan.

Here is the part they are not telling you. Effective Oct. 1, 2011 per AN 4551 all loans will now be charged an annual fee of .3% on the scheduled average unpaid principle balance, for the life of the loan. This new fee will be calculated by the lender and included in your escrow along with your taxes and home insurance. This new fee is then paid to the government, not the lender, at the end of each year.

You can't qualify for this refinance unless you are able to lower your fixed interest rate by at least 100 basis points. I think you need to apply your calculator to the numbers and think real hard before you decide to refinance. I wouldn't even consider it unless you are lowering your rate by at least 3%. I would even ask for a Truth and Lending Statement on the new rate and compare it to the one you received when you originally closed your loan. An amortization chart might also help you see the whole picture.

Ask yourself, how long you are going to live in the house? Your principle balance doesn't even begin to decrease until between twelve & fifteen years. On a $100k mortgage that is about $4500 or $300 a year, or $25 per month. The figures I have estimated in the article are all based on a mortgage of $100k. Add in your new Up Front fee and new closing costs. Not so good!

I am just saying, ... please, really do the numbers and think about it before you decide the Government is doing you a favor. I don't know your loan amount or your interest rate, or how long you have already been paying on your mortgage.

FYI, for all you Navy Vets: BOHICA is an American Indian word. Cherokee I think. Translation: Bend Over Here It Comes Again!